Doug Casey's Lessons To Learn From The Facebook Fiasco

Jun. 15, 2012 4:44 PM ET

We have been accused at times - rightfully so - of being largely focused on the trials and tribulations of the newfound political economy. Given its place as one of the biggest contributing factors to the performance of the investment markets these days, it makes sense. However, there is one area of the economy that continues to grow, largely unabated by the foolish risk-taking of investment banks and the constant flow of bailouts and "easing" - it's the technology sector. This week, I had a chance to sit down with Doug Casey to get his thoughts on a subject that has long been near and dear to him as an investor and as a person, starting with the most talked about tech story of the past month, Facebook.

Louis James: Doug, with a market capitalization surging to almost $100 billion on the IPO of a website company, subsequent 50% haircut wiping out billions of retail investors' dollars, and now a rugby-style pile-on of lawsuits, I'm sure you have some thoughts on the Facebook fiasco. Care to share?

Doug: Sure. Problems were rather predictable, from a number of points of view. First was the market valuation approaching $100 billion; that was a completely arbitrary number, based a ridiculously high P/E ratio, close to 100:1. It's true that a billion dollars isn't what it used to be, but it's still a lot of money. It tells me that there's still way too much optimism in the stock market in general. It's a new world since 2008; and it's absolutely nothing like the late '90s, when the Internet/telecom/tech bubble was inflated. People are, ironically, living in the past while they think they're investing in a technology of the future.

Apparently the majority of those who piled in at up to $45 per share were retail investors. I'm not opposed to buying IPOs; sometimes they're deliberately underpriced - in good part so the underwriter can be a hero to its clients and build a good reputation for successful offerings. But a gigantic offering, at a rich price, when the ducks are quacking? Include me out. I like deals that relatively few people are interested in or have even heard about. Of course that approach kept me out of Google, as well. But you have to play the odds.

In fact, there are very few stocks I want to own today. The financial sector is entirely too big as a proportion of the economy, and people are still way too interested in "the market" - especially as the world sinks deeper into the Greater Depression. The name of the game today shouldn't be trying to scalp a few dollars by selling some tech stock to a greater fool. It's about preserving capital.

L: No evidence of "market capitulation" on that IPO - the volume was so fast and furious it crashed the Nasdaq trading system, and lots of people never got their orders filled.

Doug: Lucky for them. The shares have gone from that $45 high to a low - so far - of $25.52. That's a 43% haircut in just a few days.

L: Sounds like a junior mining stock.

Doug: [Laughs] It does. But at least a mining company can offer a lottery ticket for life-changing gains. When you buy into something with a $100 billion market cap, you're most likely just providing liquidity for early investors who've already made 100:1, or even 1,000:1, on their money. I'm sorry to see people lose money in the market. Theoretically, investors are providing capital for new businesses and technologies. They're doing that instead of consuming wealth and frittering away capital on high living. I'd like to see them richly rewarded, which would encourage more people to do the same thing.

But people who blindly gamble on a trade they don't understand deserve their losses. Of course, since we're talking billions of dollars, the "fairness police" are sure to put this thing under a microscope. And naturally, hordes of ambulance-chasers are coming out of the woodwork to collect their fees helping people waste time and money suing each other. The result will be more people who are permanently turned off of investing. And likely lots of new rules and regulations. We're in a major bear market. The bad news is that lots of nasty things will happen to take the market lower, toward an ultimate bottom. The good news is that eventually a real bottom will be reached, and it will be possible to buy great companies unbelievably cheaply. However, there's more bad news, namely that the bottom is likely quite a while down the road…

In the meantime, the busybodies, losers, and goons who populate the "Swindlers Encouragement Commission" will have a field day. Their counterproductive rules serve only to enrich lawyers and create a false sense of security for naïve investors - as we discussed at some length in our conversation on insider trading. It's all part and parcel of an investment climate - and more importantly a moral climate - in which the public thinks someone should pay them if they gamble and lose.

It's more writing on the wall: the America that once was has been replaced by the "United State," inhabited by herds of obedient, reality-TV-educated inmates who take no responsibility for their own actions. Things are going to get worse before they get better.

L: Will it get better, Doug? You keep saying it's going to be worse than even you think it is - and I know you have a pretty fertile imagination. You say you're glad you have quiet, out-of-the way places to go to when the stock market really crashes, inflation sets in with a vengeance, and the middle class gets thoroughly wiped out. When the riots start, you want to be watching on your widescreen TV, not through your front window. That's scary enough, but if it's going to be even worse than you think it will be, what makes you think things will get better - at least in a timeframe of any use to us? How do you know things won't go "Mad Max" on us, leading to a new dark age?

Doug: Well, if the climate-change hysterics get their way, we could see a new Dark Age - or a Dark & Cold Age, since candles put carbon into the atmosphere. Starting a fire could become a capital crime.

L: That's not encouraging. I thought you were an optimist?

Doug: I am. I don't expect a new Dark Age, but neither did the Romans in the early 5th century. Everything and anything is possible, both on the upside and the downside - you don't live long and prosper by ignoring unsavory possibilities.

We've become accustomed, as a civilization, to rapid improvements in science, technology, and our general standard of living for roughly the last 200 years, since the start of the Industrial Revolution. It seems like a long time from one perspective. But it's only about eight generations, or the overlapping lives of two really old people. If you take a longer view, since biologically modern humans evolved perhaps 200,000 years ago, you see that progress was very slow. Maybe 100,000 years went by between the ability to make fire and the invention of the bow. Then maybe another 80,000 to the invention of pottery.

Maybe advances in technology are subject to periods of punctuated equilibrium, as are the evolution of species. Maybe the last 200 years of rapid progress are slowing down. It seems to me there were rapid advances in every area for that time - electricity, aircraft, telephony, atomic energy, and literally a thousand other things resulting from the systemization of science. Other than in computers, though, things seem to have slowed down over the last 50 years. I wonder if we're not just advancing past breakthroughs more than making new ones. Living off of past inertia… I really don't know if that's an accurate view; I'm just considering possibilities.

L: So why are you an optimist, then?

Doug: Well, for one thing, as we discussed in our previous conversation on technology, I think it's a very important fact that there are more scientists and engineers alive now than there have been in all of history combined. That's an extraordinarily positive thing. But looking at the trivia many of them are working on, I don't get the impression there are that many Edisons, Teslas, and Einsteins out there. Let me put that in context… there are probably more, simply because it's a standard distribution, and there are more people. But maybe conditions aren't as conducive to their blossoming as was the case 100 years ago, and making the most of their abilities is harder in some ways - although it's easier in others, like the things made possible with the Internet.

In other words, it seems to me most geniuses in the past were entrepreneurs, working in their basements and garages. Today it seems most go to work for big corporations, or especially the government; those aren't environments conducive to game-changing breakthroughs. A lot of the science today seems to require multibillion-dollar investments; it seems to consume capital, as opposed to creating capital. For instance, NASA resembles the post office more and more every day. On the other hand you've got Burt Rutan's and Richard Branson's Virgin Galactic, and Elon Musk's SpaceX. But capital has to be available to fund things like that. And the losses people have incurred in Facebook and a protracted bear market may be a disincentive to put that capital together. Plus, the actions of governments - which are largely approved of by their subjects - all over the world are very destructive of capital, even if we don't get World War III.

L: Where do you expect these trends to take us?

Doug: The two areas where it seems the most progress is being made are biotech - including medicine - and computers, in which I include robotics.

In medicine, rapid progress is being made on previously incurable diseases like cancer. I've heard credible arguments that completely effective cures - not just treatments, but cures - for various cancers may be as little as 10 years away.

And it's not just curing diseases, but understanding and prolonging life expectancy. As things stand, if we can prevent or cure all diseases, disorders, infections, and so forth, various factors point to a "natural" human life expectancy of about 120 years. But researchers already have lab rats growing new legs, vat-grown organs, and maybe the keys to slowing or stopping various aging processes altogether.

L: Wait - what happens if the Baby Boomers all get another 100 years of relatively good health?

Doug: Good question. The average age of death keeps rising - it's something like 78 now - although the ultimate age remains about 120. The key is to extend the ultimate age while reversing the aging process. There's no point in being one of Jonathan Swift's Struldbrugs. This is why "estate planning" for smart 50- to 60-somethings should not be focused on dispersing accumulated capital to younger generations, but keeping capital productive and growing for many decades to come. Anyone not already suffering from a specific, terminal condition that gives them a life expectancy of fewer than 10 years should have more than a 10- or 20-year financial plan. You want a plan that will allow you to buy the technology to live to 200, with a better body than you now have. But that possibility will be available only to those who can afford it, at least to begin with.

No one knows what life will be like on this world in 100 years, and by then we should have colonized other worlds where things could be even more different, so such plans can't be too detailed. But you only have a chance of finding out if you have the capital to buy the technology to make it possible.

L: Sounds like a lot of money.

Doug: I'm not a planner by nature. My approach to life has always been that when I come to a fork in the road, I take it. But the accumulation of personal capital is important because it offers vastly more possibilities than does being poor. Money is not hard to come by; you only need find goods and services to provide other people. Vision is hard to come by. It's because most people's vision is limited by the culture they grew up in and their own negative attitudes that money is hard for them to accumulate. You know very well that most investors, for example, don't have what it takes to be successful speculators - that's why there will always be fantastic profits for those with the independence of mind to be true contrarians and hence successful speculators.

L: Okay, well, that sounds more optimistic. But what about the dark side of advanced medical and biological technologies - bioweapons, for example?

Doug: Utopia is not an option, at least on this planet. Sure, The Andromeda Strain could wipe us all out tomorrow. Barring that, however, the trend in medicine and biotech is definitely skewed towards longer, healthier lives for most people.

L: And the other trend, in computers and robotics - are you as optimistic there?

Doug: To be honest, it's harder to be purely optimistic about this one. Powerful new technologies that lend themselves to abuse are already being deployed, and I don't just mean weapons, as in Stanley Kubrick's Dr. Strangelove - which is one of the best movies ever made. And I don't mean things as obvious as video cameras on every street corner, as in V for Vendetta - another of my all-time favorites. I'm thinking about the swarms of drones that are already taking to the air above our heads - not to mention all the stuff that surely exists but is not public knowledge yet.

On the other hand, the fact that single individuals can take on whole governments - as participants in the Anonymous group have done - shows that it's far from a foregone conclusion that we're headed for the world of 1984, where Big Brother is watching all of us all the time. The technology that could enable that is certainly on the way, but the hacks and technologies to foil universal surveillance is also certainly on the way.

More than any specific nightmare technology or scenario, like "Skynet" taking over, what concerns me is that during the Great Enlightenment and ensuing Industrial Age, scientists and inventors were almost entirely private individuals, working for profit or at least their personal interest. Now, Big Government has led to an age of Government Science, which is a very dangerous thing. And the worst part is that a lot of the best and brightest are going to work for the government or for government-funded projects, which is practically the same thing. This is giving the state access to brainpower and creativity. And, as I pointed out in my articles on why sociopaths are always and inevitably drawn to government. Combine these things and you get a really nasty combination. That is frightening.

L: Not sounding optimistic again…

Doug: I said that sub-trends like this make it harder - not impossible - to be optimistic. Overall the longest trend of them all is The Ascent of Man - and that's extremely bullish for us all.

L: Hm. Well, back to Facebook. I have to say, we did warn people to stay away from that IPO in our technology letter.

Now, I actually have a Facebook account, though I don't use it for anything. I got it some years ago, when someone suggested it would be a good way to find old friends, but mostly it's complete strangers who "friend" me... although, on the bright side, about 90% seem to be other anarchocapitalist libertarians. On the dark side, it will be one-stop shopping for the bad guys when they use Facebook to round up the usual suspects. The problem is that I don't know my Facebook friends well enough to want to get to know them, given that there are only 24 hours in a day. And I wouldn't dream of posting anything other than utter trivia about my personal life there. But I understand that others do use Facebook extensively, even to the degree of it being their primary way of communicating with their friends and family. It seems entirely too impersonal to appeal to me anyway.

L: I have a Facebook account as well, which I use largely for one-way communication, sharing a bit of my adventures with my readers - stuff they find interesting, but for which there's no room in the newsletter.

Doug: That sounds like a fairly rational use. This technology does, however, seem to be changing the way people communicate and interact. One thing Zuckerberg said in the interview was that if Facebook were a country, it would be the third largest in the world - and gaining. Now, Facebook could be out of business in a year, for all I know and care, superseded by the next online phenomenon - hopefully one that's not a direct pipeline into the NSA and every other dangerous government agency out there. But whatever comes next, the Internet is still connecting people along lines of their choosing, rather than by accident of birth, and without regard to national boundaries - or even language barriers, for that matter. Things like Facebook are basically giant engines for creating phyles, and that, as we've discussed, is what I think the social organization is evolving toward.

We can see it happening. Virtual communities are forming, solidifying, and becoming more important to many of their members than nationality, race, or even religion. The future is taking shape right on our screens. The question is where this will ultimately lead…

Once talking about technology, it is easy to continue on the subject for a long time... understandable, given the sheer number of breakthrough developments of the past few years. After all, it was only five years ago that the first iPhone was released... two years ago for the iPad. All of this development also presents a remarkable set of opportunities for investors. It's the reason that Doug has long championed having a technology-investing division. For the past three years, that division has been headed by Alex Daley. He and his team have posted an incredible track record in that brief period - including a very accurate call on the direction of the Facebook IPO. Part of their success lies in understanding that behind every amazing advance are great minds - minds that are so valuable to tech companies that they are willing to fight to get the best and brightest on their team.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.